Skip to main content Accessibility help
×
Home

A DYNAMIC ANALYSIS OF THE MICROSTRUCTURE OF MOVING AVERAGE RULES IN A DOUBLE AUCTION MARKET

  • Carl Chiarella (a1), Xue-Zhong He (a1) and Paolo Pellizzari (a2)

Abstract

Inspired by the theoretically oriented dynamic analysis of moving average rules in the model of Chiarella, He, and Hommes (CHH) [Journal of Economic Dynamics and Control 30 (2006), 1729—1753], this paper conducts a dynamic analysis of a more realistic microstructure model of continuous double auctions in which the probability of heterogeneous agents trading is determined by the rules of either fundamentalists mean-reverting to the fundamental or chartists choosing moving average rules based on their relative performance. With such a realistic market microstructure, the model is able not only to obtain the results of the CHH model but also to characterize most of the stylized facts including volatility clustering, insignificant autocorrelations (ACs) of returns, and significant slowly decaying ACs of the absolute returns. The results seem to suggest that a comprehensive explanation of several statistical properties of returns is possible in a framework where both behavioral traits and realistic microstructure have a role.

Copyright

Corresponding author

Address correspondence to: Paolo Pellizzari, Dipartimento di Matematica Applicata, S. Giobbe—Cannaregio 873, 30121 Venice, Italy; e-mail: paolop@unive.it.

References

Hide All
Becker, R.A., Chambers, J.M., and Wilks, A.R. (1988) The New S Language: A Programming Environment for Data Analysis and Graphics. Pacific Grove, CA: Wadsworth and Brooks/Cole.
Brock, W. and Hommes, C. (1997) A rational route to randomness. Econometrica 65, 10591095.
Brock, W. and Hommes, C. (1998) Heterogeneous beliefs and routes to chaos in a simple asset pricing model. Journal of Economic Dynamics and Control 22, 12351274.
Chiarella, C., Dieci, R., and Gardini, L. (2002) Speculative behaviour and complex asset price dynamics. Journal of Economic Behavior and Organization 49, 173197.
Chiarella, C., Dieci, R., and Gardini, L. (2005) The dynamic interaction of speculation and diversification. Applied Mathematical Finance 12, 1752.
Chiarella, C., Dieci, R., and He, X. (2006a) Heterogeneous expectations and speculative behaviour in a dynamic multi-asset framework. Journal of Economic Behavior and Organization 62, 402427.
Chiarella, C., Dieci, R., and He, X. (2009a) Heterogeneity, market mechanisms and asset price dynamics. In Hens, T. and Scheink-Hoppe, K. (eds.), Handbook of Financial Markets: Dynamics and Evolution, pp. 277344. Amsterdam: North-Holland.
Chiarella, C. and He, X. (2001) Asset price and wealth dynamics under heterogeneous expectations. Quantitative Finance 1, 509526.
Chiarella, C. and He, X. (2002) Heterogeneous beliefs, risk and learning in a simple asset pricing model. Computational Economics 19, 95132.
Chiarella, C. and He, X. (2003) Heterogeneous beliefs, risk and learning in a simple asset pricing model with a market maker. Macroeconomic Dynamics 7, 503536.
Chiarella, C., He, X., and Hommes, C. (2006b) A dynamic analysis of moving average rules. Journal of Economic Dynamics and Control 30, 17291753.
Chiarella, C., He, X., and Hommes, C. (2006c) Moving average rules as a source of market instability. Physica A 370, 1217.
Chiarella, C. and Iori, G. (2002) A simulation analysis of the microstructure of double auction markets. Quantitative Finance 2, 346353.
Chiarella, C., Iori, G., and Perellò, J. (2009b) The impact of heterogeneous trading rules on the limit order book and order flows. Journal of Economic Dynamics and Control 33, 525537.
DeGrauwe, P. and Grimaldi, M. (2006) Exchange rate puzzles. A tale of switching attractors. European Economic Review 50, 133.
Gaunersdorfer, A. (2000) Endogenous fluctuations in a simple asset pricing model with heterogeneous agents. Journal of Economic Dynamics and Control 24, 799831.
Gode, D. and Sunder, S. (1993) Allocative efficiency of markets with zero intelligence traders. Journal of Political Economy 101, 119137.
He, X. and Li, Y. (2007) Power law behaviour, heterogeneity, and trend chasing. Journal of Economic Dynamics and Control 31, 33963426.
He, X. and Li, Y. (2008) Heterogeneity, convergence and autocorrelations. Quantitative Finance 8, 5879.
Hommes, C. (2001) Financial markets as nonlinear adaptive evolutionary systems. Quantitative Finance 1, 149167.
Hommes, C. (2002) Modeling the stylized facts in finance through simple nonlinear adaptive systems. Proceedings of the National Academy of Science of the United States of America 99, 72217228.
Hommes, C. (2006) Heterogeneous agent models in economics and finance. In Tesfatsion, L. and Judd, K. (eds.), Handbook of Computational Economics, pp. 11091186. Amsterdam: North-Holland.
LeBaron, B. (2006) Agent-based computational finance. In Tesfatsion, L. and Judd, K. (eds.), Handbook of Computational Economics, pp. 11871233. Amsterdam: North-Holland.
LiCalzi, M. and Pellizzari, P. (2003) Fundamentalists clashing over the book: A study of order driven stock markets. Quantitative Finance 3, 470480.
Lux, T. (2006) Financial Power Laws: Empirical Evidence, Models, and Mechanism. Economics Working Papers n. 2006.12, Department of Economics, Christian-Albrechts-University of Kiel.
Lux, T. (2009) Stochastic behavioural asset pricing and stylized facts. In Hens, T. and Scheink-Hoppe, K. (eds.), Handbook of Financial Markets: Dynamics and Evolution, pp. 161215. Amsterdam: North-Holland.
Maslov, S. (2000) A simple model of an order-driven market. Physica A 278, 571578.
Pagan, A. (1996) The econometrics of financial markets. Journal of Empirical Finance 3, 15102.
Pellizzari, P. and Westerhoff, F. (2009) Some effects of transaction taxes under different microstructures. Journal of Economic Behavior and Organization 72, 850863.
Westerhoff, F. (2003) Speculative markets and the effectiveness of price limits. Journal of Economic Dynamics and Control 28, 439508.
Westerhoff, F. (2004) Multiasset market dynamics. Macroeconomic Dynamics 8, 591616.

Keywords

A DYNAMIC ANALYSIS OF THE MICROSTRUCTURE OF MOVING AVERAGE RULES IN A DOUBLE AUCTION MARKET

  • Carl Chiarella (a1), Xue-Zhong He (a1) and Paolo Pellizzari (a2)

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed